More on Declining Marginal Utility: Reply to Yglesias and Clarke

Matt Yglesias and Conor Clarke seem to see the same upshot as Chait in the idea that rich people spend way more than poor people for stuff that isn’t that much better. Here’s Yglesias:

[T]he point here is that the marginal utility of money income declines as it grows. This is also a strong argument for believing that redistributing money from wealthy or high-income individuals to the poor or to public services will be welfare-enhancing. The difference, in welfare terms, between a Sub-Zero refrigerator and an Ikea refrigerator is much smaller than the difference in welfare terms between having health insurance and not having health insurance. So a surtax on high earners that goes to finance expansion of health coverage to the working poor is making people better off. In that case, when we look at statistics indicating skyrocketing income inequality we’re seeing evidence of inefficiency that can be rectified through the policy process.

If rich families are spending an additional $10,650 for fridges that will offer little in the way of “lived difference,” this does not suggest to me that all is peachy in the U.S. of A. It suggests that those rich families have $10,650 lying around that could be redistributed at little “lived” cost!

So, if Will’s argument is that income differences in the United States increasingly fail to translate into commensurate differences in consumption, why isn’t this just a brilliant argument in favor ofredistributing more income than we already do? Perhaps Will Wilkinson of the Cato Institute should be a hero to liberals everywhere!

I think Conor’s right that I should be a hero to liberals everywhere, because I’m an awesome liberal! But seriously. First of all, there’s all the stuff I said in my reply to Chait. Everybody go and read David Schmidtz on DMU. If you think DMU is a utilitarian argument for progressive redistribution, you might really be logically committed to a utilitarian argument for higher levels of wealth inequality! The problem might be that the rich consume too much and save too little. It might turn out to be inefficient for the rich to spend ten thousand bucks on a fridge. But a much smaller fridge and several thousand in an index fund might do more for utility overall than a transfer. DMU might be the basis for an argument about tax incidence, not tax levels.

Don’t forget about the way luxuries typically become democratized. That rich people were willing to buy plasma TVs for thousands of dollars several years ago has a lot to do with the fact that I was able to buy an even better plasma TV for $600 in June. Goods that can be mass manufactured are by definition non-positional. But the timing of the consumption of newly introduced goods can be positional. Eager early adopters subsidize the rest of us.

Also, Keynesians should be careful not to suddenly forget their beliefs about the downstream demand-side effects of consumption. Progressive redistribution targeted at low hedon-per-dollar luxury consumption should be expected to reduce aggregate demand. The rich will shift away from consumption toward savings. And some portion of the tax collected will be lost in the journey of the leaky bucket.

Most importantly, utilitarianism is false. I don’t know about Conor, but I know Matt and I disagree about this. Like Rawls, I think the fact that utilitarianism is completely indifferent to the question of whether an individual’s income and wealth is or is not a result of exchange according to fair procedures is one of the main reasons it is false. How we came to have what we have matters. Utilitarianism says it doesn’t matter. So utilitarianism is false. As far as I’m concerned, the main reason you can’t just take my TV or take the money out of my wallet and give it to somebody who would get more out of it is that it’s my TV, it’s my money. It’s not yours to redistribute.

Of course, both property rights and the power to coercively redistribute property require justification. Suppose we’ve justified both. It remains that when gains are not ill-gotten, the state’s exercise of a legitimate power to redistribute requires justification; it must not be an undue infringement or limitation of property rights. If one among several revenue-equivalent tax schemes harms the taxed less than other schemes, but helps the recepients of transfers just as much, that’s a good reason to prefer it. I suspect that a consumption tax, which discourages luxury consumption and encourages productive investment, may be preferable to a revenue-equivalent income tax for DMU reasons. But DMU doesn’t deliver the gotcha argument Chait, Yglesias, and Clarke seem to think it does.

Anyway, you’ve got to love the heads I win, tails I win attitude that seems to be at work here. If I’m wrong, and real consumption inequality has increased a great deal, tax-loving liberals will take that as a reason to tax high-income individuals at a higher rate. Justice demands we close the gap! If I’m right, and real consumption inequality has not increased much, because the effective rate of inflation for the rich has been so much higher than the effective rate for the poor, tax-loving liberals say that just goes to show why we should tax high-income individuals at a higher rate and redistribute more. The principle of utility demands progressive redistribution!

One more point. I know Matt thinks the U.S. spends too much on defense. So why argue for a new tax on the rich to finance health coverage when the program could just as well be financed by changing our budgeting priorities? This would obviously be far superior in terms of both utility and justice.

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40 Replies to “More on Declining Marginal Utility: Reply to Yglesias and Clarke”

I think Dave has the knockdown argument here: DMU is not a slam-dunk for redistribution. Instead, once DMU is seen in the light of a dynamic economic perspective, the point becomes a subtle one that appeals to economic theory and large collections of statistics. Dave has slowed the DMU argument in the philosophy literature. Kudos to bringing the point to the blogosphere.

Keynesian economics has nothing to do with this. Keynesian economics says that during recessions we need to boost aggregate demand and during booms we need to increase it. It has nothing much to do with long term redistribution. I think there are problems with utilitarianism but then you need to have some other way to calculate what is right and what is wrong or you need to say morality is bunk. Its perfectly pointless to have a moral theory and no way to know what is and isn't right or wrong. Matt supports higher taxes on the rich, he supports higher taxes on the poor, he supports cutting defense spending. I think you are right that this isn't the best response to your paper. A better one is that at a given level of GDP if their is less inequality that is a good thing. Maybe there is no way to reduce inequality without greatly reducing GDP, but Yglesias doesn't think so.

Also my view on how progressive our tax code should be has nothing at all to do with how much inequality we have. It has to do with the effect the progressive taxes has on GDP. If you could convince me that progressive taxes reduced GDP enough I would say they go too far. I tend to support liberal trade policies and liberal immigration policies for that very reason.

Schmidtz's view does have implications for charitable giving as well. But his view does not hold that all redistribution must end or that all charitable giving must end. Instead, it should be reduced. Although, charity is more complex because people get net utility out of contributing to causes and organizing charitable organizations. To see Schmidtz's view in detail, see his side of the debate in Social Welfare and Individual Responsibility.

Also, charitable giving might have to take the form of investments, say in microcredit. See his 'Islands in a Sea of Obligations' paper which is on line in the Independent Review. Dave himself struggled with how to effectively give when he was in Africa.

I see responses to Yglesias, Clark, and Chait, but none to little old DG here, who had written below that you all missed the point, that taking from the rich to give to the poor could not reduce but only increase inequality.How about a response to Lesvic?And, by the way, how could I contact Chait. I have been responding to him for years, but only within the confines of my own computer, and would dearly love to confront him out in the open.

Maybe. But cutting defense would probably be just as feasible as taxing the rich if liberal opinion leaders spent as much time arguing for cutting defense spending as they do arguing for tax increases on the rich. To Matt's credit, he argues for cutting defense spending a lot. I wish more mainstream liberals would follow his example.

Denmark has the world's lowest level of income inequality because of a very high level of redistribution.Try looking for Chait's contact info on the TNR site. If it's not there, he's probably trying to avoid unsolicited contact.

Since they are all complex, “Every historical experience is open to various interpretations and is in fact interpreted in different ways…History can neither prove nor disprove any general statement.” Ludwig von MisesSince there are anecdotes on both sides of every argument, but logic on only one, economics is not an anecdotal but a logical science. There is no economics without logical explanations of economic phenomena. Anecdotes without logic are superstition, and the superstitions of economists no better than those of ballplayers, not changing their socks so long as they keep getting hits, except that in the one case we call it superstition and in the other empirical or technical economics. DG LesvicDo you have any economic logic behind your assertion, or is it mere superstition?

Since they are all complex, “Every historical experience is open to various interpretations and is in fact interpreted in different ways…History can neither prove nor disprove any general statement.” Ludwig von MisesSince there are anecdotes on both sides of every argument, but logic on only one, economics is not an anecdotal but a logical science. There is no economics without logical explanations of economic phenomena. Anecdotes without logic are superstition, and the superstitions of economists no better than those of ballplayers, not changing their socks so long as they keep getting hits, except that in the one case we call it superstition and in the other empirical or technical economics. DG LesvicDo you have any economic logic behind your assertion, or is it mere superstition?

Permit me to answer the question for you.Redistribution could reduce inequality only in the absence of a market. So long as there was a market, redistributive interference with it, like any other, could only be counterproductive, bringing about the exact opposite result of what was intended, in this case, not reducing but increasing inequality, in Denmark or anywhere else.Economic logic tells me that. What, if anything, does it tell you?

Mises is flat wrong. History proves and disproves lots of general statements. Indeed, that's generally how general statements are confirmed or disconfirmed. Also, there is no such thing as an priori science, much less an a priori social science. I suspect we'll find it hard to move past this disagreement.

Markets aren't logical constructs. They're complexly constituted, historically contingent systems of empirical institutions. Anyway, since there has been a fair amount of non-counterproductive redistribution, I guess you're logically bound to deny that the institutions in those places were called “markets”. OK. Why do you think stipulative definitions are interesting?

Mr Wilkinson,I'm a bit confused. There were two responses from you in my e-mail box, but I only see one here. What happened to the other one? I recall you're saying in that one that Mises was wrong. And since your only rebuttal to me was a denial of logic itself, my task is not merely to defend my own logic but logic per se.Here, briefly, is how Mises did so, as I related it, in The Chicago School of Supersition.While, to Milton Friedman, the test of a theory is how it works out in practice, to the man he read out of the science, Ludwig von Mises, such tests can never be conclusive, for there is always the question of whether concurring events are cause and effect or coincidence. “The question whether there is any connection between them can only be answered by” a theory “established beforehand on the ground of aprioristic reasoning…If there were no economic theory…economic facts would be nothing more than…unconnected data open to any arbitrary interpretation.” Theories of human action “are, like…logic and mathematics, a priori…not subject to verification or falsification on the ground of experience and facts….both logically and temporally antecedent to any comprehension of historical facts…a necessary requirement of any intellectual grasp of historical events. Without them we should not be able to see in the course of events anything else than kaleidoscopic change and chaotic muddle.” “There is no means of studying the complex phenomena of action other than first to abstract from change altogether, then to introduce an isolated factor provoking change, and ultimately to analyze its effects under the assumption that other things remain equal.” “Action and reason are congeneric and homogenous…two different aspects of the same thing. That reason has the power to make clear through pure ratiocination the essential features of action is a consequence of the fact that action is an offshoot of reason…Logical thinking and real life are not two separate orbits. Logic is for man the only means to master the problems of reality. What is contradictory in theory is no less contradictory in reality.” And, as before, since they are all complex, “Every historical experience is open to various interpretations and is in fact interpreted in different ways…History can neither prove nor disprove any general statement.”And, answering Simon, as well as yourself: When history flies in the face of logic, it isn't logic that is wrong. When you don't have logic on your side, you can always conjure up statistics. But if your “history” was right, and my logic wrong, you ought to be able to tell us why. I'm still waiting for you to do so. Instead, you expect me to tell you why your “history” was wrong.But while your “history” must be taken on faith, logic is before our very eyes.Again, I ask, have you anything besides supersition and faith healing?

It looks as though there were some delayed postings, and everything got out of sequence here. So, readers, please make allowances for that.But I can tell you right now how this discussion will wind up. Since Mr Wilkinson will leave reason, science, and economics to me, I will be glad to leave superstition and faith healing to him.

And what that means is that, whatever the conclusions of superstition and blind faith, the scientific conclusion is that taking from the rich to give to the poor can not reduce but only increase income inequality and “social injustice.”

You are actively annoying people and losing sympathy for you position. If I write a post about fundamental economic or scientific methodology, feel free to pipe up. If I write a post about anything else, feel free to say something useful about the actual topic of conversation. Dragging every topic back to fundamental methodology is neither useful nor welcome. I'm aware of your objections to doing social science the empirical way. There is no need to bring it up again.

Goods that can be mass manufactured are by definition non-positional. But the timing of the consumption of newly introduced goods can be positional. Eager early adopters subsidize the rest of us.I don't see that. Just as early adopters subsidize everybody else, so to do people who continue to buy the top-of-the-line, 'gold plated' versions (with much fatter profit margins) even after the early adoption period. Or, if you're going to take the stance that positional goods are only those that have a limited supply and status ranking (e.g. Manhattan real-estate, slots in the Harvard freshman class), then early adoption of technology doesn't qualify either (there was no effective limit on how many iPods Apple could produce during the early days when they cost ~$500, just a limit on how many people were willing and able to spend that kind of money).

dg-You've made this assertion several times, but I don't remember the logic behind it. I assume you're thinking something along these lines:Redistribution increases marginal tax rates, which creates a disincentive to climb to new tax brackets, thereby perpetuating and exacerbating inequality. You can only make this assertion if you know that the disincentive to work is very large. That's a synthetic proposition. You can't know it a priori.

And Mr Wilkinson, one other thought. I know that you can “disprove” my theory by your empirical method. I knew that before you attempted it. I have known since my earliest days in economics, before you were born, that the empirical method could be used to “disprove” anything in economics. So that was no great accomplishment. The real test is disproving the theory on its own terms.Can you do that?

I also favor drastically cutting defense spending. But I very much doubt that voters could be persuaded that cutting defense spending is a good idea; the rhetorical responses to such arguments are far too easy to make.

I'm sure the discussion would be welcome here, as long as you don't do it in a tone deaf manner. We're libertarians, after all. First Amendment for life!I appreciate many aspects of Austrian thought. In particular, I think the concept of the time structure of capital, aka the heterogeneity of capital (Mario Rizzo over at ThinkMarkets has written about this) is a devastating critique of the Keynesian IS-LM model–upon which the idea of fiscal stimulus is based.That said, to reach a valid, true conclusion from logic alone requires true assumptions (I think; it's been a while since I took logic). If you cannot know your assumptions a priori, then you require empirical evidence to support them. It is as simple as that. Otherwise, you merely end up arguing which assumptions are true and the valid arguments are meaningless. Which is the cause of the shoutfest here in the comments.